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Brendan Larsen: Milford Asset Management expert on the 'political risks' impacting financial markets · Best of Business

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  Speaker 1: You're listening to a podcast from Newstalk ZB. Follow this
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  Speaker 2: Brendan Larson, Milford Asset Management's with us. Hi, Brendan.
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  Speaker 1: Good evening, Heather.
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  Speaker 2: Now, obviously, our focus at the moment is on the election,
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  Speaker 2: but you've been saying the political stories that matter more
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  Speaker 2: for our markets actually are happening overseas. So what are
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  Speaker 2: you looking at?
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  Speaker 1: Yeah, look, that's right. And the next 12 months have
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  Speaker 1: more political risk for markets than we've seen for some time.
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  Speaker 1: Germany has a chancellor now with very low approval ratings.
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  Speaker 1: The UK has a budget in three weeks where they've
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  Speaker 1: got very little fiscal room. But the two that really
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  Speaker 1: matter for markets are France and the United States. The
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  Speaker 1: common issue among all of these is really coming down
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  Speaker 1: to debt. So deficits are sort of 5% to 7%
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  Speaker 1: of GDP across all these regions. Interest costs are rising.
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  Speaker 1: And the politics of actually getting it all fixed is
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  Speaker 1: getting harder and harder. And bond markets have started charging
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  Speaker 1: for that. And that flows through to borrowing costs everywhere,
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  Speaker 1: including in New Zealand.
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  Speaker 2: Start with France for me. Why is that the one
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  Speaker 2: that you're the most focused on?
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  Speaker 1: Yeah, so France is where politics and the bond market
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  Speaker 1: have collided. The government is a minority, the third in
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  Speaker 1: a year, in fact, and the previous two fell trying
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  Speaker 1: to pass budgets. The deficit there is well over 5%
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  Speaker 1: of GDP, and nobody currently has the votes to bring
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  Speaker 1: it down. So markets have noticed. France now pays more
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  Speaker 1: to borrow than Italy and more than Greece. So 10
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  Speaker 1: years ago, that would be unthinkable. The gap between French
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  Speaker 1: and German borrowing costs is now the widest of this cycle,
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  Speaker 1: and so again, another significant indicator of stress. So there's
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  Speaker 1: a budget going through the Parliament this month, and the
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  Speaker 1: government will probably have to force it without a vote,
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  Speaker 1: which triggers a no-confidence motion. And so that only gets
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  Speaker 1: through if the far right abstain, and even if it passes,
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  Speaker 1: it's likely a more watered-down budget that isn't really going
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  Speaker 1: to fix much this year.
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  Speaker 2: And then what do you think the election next year means?
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  Speaker 1: Yeah, so elections are sort of, yeah, April with a
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  Speaker 1: runoff in May next year. So the market is starting
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  Speaker 1: to think about that. And there's probably some incentive there
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  Speaker 1: to pass a budget this year because the public don't
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  Speaker 1: take well to, you know, a party looking to bring
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  Speaker 1: down a government ahead of a key election. So at
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  Speaker 1: the moment, Marine Le Pen's national rally is leading comfortably
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  Speaker 1: and she'll almost certainly make that runoff election. She's moderated
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  Speaker 1: a lot of her sort of more radical policies, which,
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  Speaker 1: you know, included things like leaving the EU. So that's
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  Speaker 1: been dropped. but her economic plan still doesn't add up yet.
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  Speaker 1: The key for markets is actually the parliamentary election in June,
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  Speaker 1: so a few weeks after the presidential election. If she
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  Speaker 1: wins the presidency and gets a majority, she can actually
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  Speaker 1: govern and the market has to price her plan. But
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  Speaker 1: if she wins without one, France stays stuck as it
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  Speaker 1: is now, and there's really no sort of way to
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  Speaker 1: fix that deficit issue.
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  Speaker 2: Let's switch to the States. We've got those midterms coming
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  Speaker 2: up in four weeks. What are you thinking about those?
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  Speaker 1: Yeah, so Democrats are sort of looking very likely to
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  Speaker 1: win the House, and the Senate is now a toss-up,
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  Speaker 1: but in recent weeks is leaning towards Democrats as well.
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  Speaker 1: Trump's approval is at a second-term low, and that's really
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  Speaker 1: driven by sort of low satisfaction around how he has
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  Speaker 1: handled the cost of living. The interesting part around this
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  Speaker 1: is really that the consensus among political analysts is that
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  Speaker 1: that potentially doesn't actually change as much as people think.
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  Speaker 1: Congress controls legislation and spending. But the president controls tariffs,
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  Speaker 1: foreign policy, military, immigration. And so if the Democrats win,
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  Speaker 1: Trump can't pass new tax or spending measures, but he
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  Speaker 1: can still do many things that have been moving markets
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  Speaker 1: in his second half of his term. Some argue that
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  Speaker 1: a sort of gridlock Congress actually means more executive action,
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  Speaker 1: not less. So the positive angle from that aspect is
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  Speaker 1: that it potentially means the deficit is slightly better under
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  Speaker 1: a gridlock scenario. because neither party can push through more
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  Speaker 1: aggressive spending. And so that's at the margin positive for
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  Speaker 1: government bonds.
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  Speaker 2: That's one way of looking at it. Brendan, thanks, mate.
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  Speaker 2: Good to talk to you as always. Brendan Larson, Milford
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  Speaker 2: Asset Management.